FAQ - Including Video FAQ

What is a Short Sale in Real Estate?

A short sale is a negotiated arrangement with the lender[s] on a property that allows the property to be sold for less than the full amount of the loan[s]. The lender typically allows a real estate commission and other costs to be paid from what could have been loan proceeds. The remaining deficiency [difference between the shorted payoff and the amount owing on the loan] may be forgiven or may not, depending on lender policies and whether the short sale is done under the auspices of a government program.

Who can use the short sale approach?

A distressed property owner has to show documented evidence of a hardship, such as loss of employment, illness, business failure, inadequate cash flow to make mortgage payments. The property owner cannot have any personal financial liquidity from bank deposits or securities, although currently lenders are exempting retirement assets in 401K or IRA accounts from this calculation.

How could a short sale affect my credit score?

The FICO Score that influences so many credit decisions will take a beating as a result of a short sale. This occurs because a short sale results in the settlement of a debt for than less than the full amount owing. The actual reduction in credit score could be 100 to 150 points, depending on the state of the borrower’s credit before the short sale.

Is a short sale a better solution than a foreclosure?

For the lender, it typically gets the lender more funds recovered and more quickly. For the borrower, it typically results in a “grey mark” on the borrower’s credit report, and an impact that lasts for about three years. A foreclosure is viewed as a black mark the impact of which could last for seven years. 

What are the key areas about which to be concerned in a short sale? 

  • The borrower must be clear about the services being provided by the Short Sale Company or Realtor. Is the short sale facilitator simply a buyer with no fiduciary obligation to the borrower? 
  • The pricing of the property is a definite concern. The price must be low enough to sell the property in a difficult market; it also must be high enough to satisfy the lender. 
  • Time frame expectations for short sales typically range from 90 days to 270 days depending on lender efficiency and market conditions. 
  • Will there be a release from deficiency? If this isn’t stated in the Short Sale Approval Letter, then the Borrower should ask the lender what the policy is? Continued collection could happen, or the lender may agree to a settlement over time on the deficiency.
  • What is the experience level of the Short Sale Facilitator or Realtor? Many Realtors hold themselves out to be capable in this area, but have taken a one-day course and obtained a few initials behind their name. The Realtor may include the service as part of their commissions, but this is viewed by many Realtors as a really low-paid assignment. A specialized Short Sale Company may charge the Borrower a fee, or have the actual Buyer pay the fee, at the time of closing. Being willing to include a fee for these services could be the wisest course of action, because the short sale process is time-intensive and requires a combination of understanding of the mortgage industry, the real estate market and finally the ability to advocate on the Borrower’s behalf with the Lender’s Collection/Loss Mitigation Department.

Are there tax ramifications to a short sale?

Maybe; and the Borrower should contact a CPA or tax attorney for advice in this respect. The Mortgage Debt Forgiveness Act of 2007 may apply if the subject property is a primary residence. Do not rely on the comments by a Realtor or Short Sale Company for this opinion, unless they are a practicing tax professional as well.

Do the Short Sale Specialists work with Realtors?

Absolutely, yes we do. If you don’t have a Realtor on board, we prefer to include one of our team members who have extensive experience in short sale processes. We can, however, direct the participation of a Realtor in the Borrower’s community, after we’ve interviewed them to be sure they are a good fit.

end faq

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